What is compound interest?
Compound interest means you earn interest on your original money and on the interest you already earned. Over time this snowball effect makes growth speed up. The formula for a single deposit is A = P(1 + r/n)nt, where P is the starting amount, r the annual rate, n the number of compounding periods per year and t the number of years.
Why time matters more than the rate
Starting early gives your money more periods to compound. Someone who invests for 30 years ends up with far more than someone who invests the same monthly amount for 20 years, even if the second person finds a slightly higher return. Try changing the years field above to see the curve bend upward in the later years.
Does compounding frequency matter?
A little. Compounding monthly instead of annually gives a slightly higher result at the same stated rate, and daily is a touch higher again. The difference is much smaller than the effect of saving more each month or leaving the money invested longer.
The rule of 72
A quick mental shortcut: divide 72 by the annual rate to estimate how many years it takes money to double. At 6% it is about 12 years, and at 9% about 8 years.
Frequently asked questions
How do I calculate compound interest?
For one deposit use A = P(1 + r/n)^(nt). With regular deposits, each month's balance is the previous balance plus its interest plus the new deposit, which is what this calculator does.
What interest rate should I use?
Use the rate your account actually pays for savings accounts or CDs. For long-term stock market investing, many people test a range such as 5% to 8% before inflation, knowing returns vary every year.
What is the difference between simple and compound interest?
Simple interest is paid only on the original amount. Compound interest is paid on the original amount plus accumulated interest, so it grows faster.
Does this include taxes and inflation?
No. Taxes, fees and inflation reduce your real return. Consider using a lower rate to approximate the effect of inflation.